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I don’t want to be the SUCKER FISH!

It is laudable of SGX to be thinking of offering retail investors a chance to participate more in the bond market. However, are retail investors too late in joining the party? Two recent articles reinforced my view that it might be too late to buy Singapore dollar denominated bonds now especially the long dated bonds.

First Article: In a live appearance on CNBC, the ‘Oracle of Omaha’ Warren Buffett warned that investors who bought long-term bonds could lose a lot of money when interest rate increases. He added that he cannot predict when and how much the interest rate will go up but he is certain that it will eventually go up.

Second Article: Closer to home, National Development Minister Khaw Boon Wan warned property buyers of over-committing as interest rates for home loans will not remain low forever and future home loan interest rates could be much higher than today. It’s sensible – I will probably heed his warning and change my floating rate loan to a fix rate loan as soon as I can.

With the 10 year SGD government bond yields close to all time low, it does not take a genius to figure out that interest rates will eventually go up.

Bond price move inversely to interest rate, i.e. when interest rate rises, the price of a bond falls. Ignoring credit risks, the price of a long-dated bond will fall more than a shorter-dated bond when interest rate rises (industry speak: duration). By the same extension, it is more risky to buy Genting Singapore’s 5.125 per cent retail perp because if the bond is not called in 2017 at Genting’s discretion, one might be stuffed with a fixed rate bond (5.125% coupon) with infinite maturity, which will not be a pretty position at a time when interest rates are increasing.

So are you safer with shorter dated bonds? Yes, but be ready to accept much lower yields. At current market levels, you should expect less than 2% yields for two year bonds and less than 3.5% yields for bonds up to five year maturity…..

I don’t want to be the SUCKER FISH by buying bonds (especially retail bonds) now. But what kind of investments can offer me better buffers from interest rate hikes and at the same time generate acceptable returns ? Waiting for a new asset category like….